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Archive for July, 2006

Nobel Prize winner William F. Sharpe discusses the foundations of successful investing — Part 2

Wednesday, July 12th, 2006
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Recently, we had the rare opportunity to speak with one of the giants of investment and portfolio theory, William F. Sharpe (See Professor Sharpe’s bio, below). Our goal in doing the interview was to explore how the world’s most knowledgeable investors approach securities markets, and to do so in the simplest language possible. Thanks to Professor Sharpe’s patient and thoughtful explanations, we think we’ve succeeded in capturing valuable, accessible insights into the most reliable, rational investment approaches being used in practice today. Whether you’re an amateur investor or a seasoned professional, there’s something here for you.

This is the conclusion of our two part interview. (Part One is still available here on the Pro Money Talk website here, as well as on the iTunes Music Store.)

In Part Two of the interview, we discuss some fascinating and challenging topics, including:

• Behavioral finance and efficient markets. What impact does irrational behavior on the part of investors have on risk/reward relationships in financial markets?

• The impact of technology on financial advice. With all of the new tools and so much information available, are investors better off?

• Current academic pioneers of note in the fields of finance and investing. (See below for links to the people that Professor Sharpe believes are on the cutting edge of investing and life-cycle money management.)

• The emerging field of “retirement economics,” and the need for integration of the fields of investments and insurance.

• Foreign trade and outsourcing. How can we balance the benefits and costs?

• Sharpe’s Four Pillars of Investment Wisdom: Diversify, Economize, Personalize and Contextualize. Learn why these four concepts are the cornerstones of successful investing, and how to apply them.

People, Resources and Concepts Mentioned in Part Two of the Interview

John H. Cochrane (University of Chicago) — Asset Pricing

Book: Asset Pricing

John Campbell (Harvard) — Life Cycle Issues

Olivia Mitchell (Wharton) — Investments & Insurance Integration

Jim Poterba (MIT) — Effects of Taxation on Investment & Retirement


William F. Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University’s Graduate School of Business. He joined the Stanford faculty in 1970, having previously taught at the University of Washington and the University of California at Irvine. In 1996, he co-founded Financial Engines, a firm that provides online investment advice and management for individuals, and currently serves on its board.

He was one of the originators of the Capital Asset Pricing Model, developed the Sharpe Ratio for investment performance analysis, the binomial method for the valuation of options, the gradient method for asset allocation optimization, and returns-based style analysis for evaluating the style and performance of investment funds.

Dr. Sharpe has published articles in a number of professional journals, including Management Science, The Journal of Business, The Journal of Finance, The Journal of Financial Economics, The Journal of Financial and Quantitative Analysis, The Journal of Portfolio Management, and The Financial Analysts’ Journal.

He has also written six books, including Portfolio Theory and Capital Markets (McGraw-Hill, 1970 and 2000), Asset Allocation Tools (Scientific Press, 1987), Fundamentals of Investments (with Gordon J. Alexander and Jeffrey Bailey, Prentice-Hall, 2000) and Investments (with Gordon J. Alexander and Jeffrey Bailey, Prentice-Hall, 1999).

Dr. Sharpe is past President of the American Finance Association. In 1990 he received the Nobel Prize in Economic Sciences.

He received his Ph.D., M.A. and B.A. in Economics from the University of California at Los Angeles. He is also the recipient of a Doctor of Humane Letters, Honoris Causa from DePaul University, a Doctor Honoris Causa from the University of Alicante (Spain), a Doctor Honoris Causa from the University of Vienna (Austria) and the UCLA Medal, UCLA’s highest honor.

A detailed vitae sheet is available at Additional information can be found on the world-wide web at and